U.S. dollar adds to gains after retail sales

SaumyaVaishampayan

NEW YORK (MarketWatch) — The U.S. dollar extended gains Tuesday after retail sales rose for the fourth consecutive month in July.

U.S. retail sales edged up 0.2% in July compared with expectations of an increase of 0.3%. Excluding auto sales, which jumped in May and June, the increase was 0.5% compared with expectations of 0.4% growth.

July retail sales rise

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The dollar couldn’t hold on to gains made after Atlanta Fed President Dennis Lockhart said Tuesday a slowing of the Federal Reserve’s monthly $85 billion in asset purchases should be seen as “a cautious first step.” But any clarification on a complete unwinding of those purchases is unlikely to come in September because of the economy’s “uneven performance,” he said.

The euro
EURUSD, +0.03%
fell to $1.3259 from $1.3308 late Monday in North America.

The dollar
USDJPY, -0.01%
climbed more than 1.5% to 98.22 Japanese yen from ¥96.66 late Monday.

“Retail sales including revisions was fractionally better than expected, sent U.S. yields higher and gave the dollar a lift. That makes sense,” said Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp.

What made less sense was the fact that the euro didn’t get lasting support from positive German economic sentiment data, arguably more important than retail sales in the U.S., he said. Franulovich said the euro’s reaction highlights the need for caution in reading too much into price action during slow summer trading.

The ICE dollar index
DXY, -0.07%
which tracks the U.S. currency’s movement against six rivals, rose to 81.772, up from 81.331 late Monday in North American trade. The WSJ Dollar Index
BUXX, -0.02%
which uses a slightly wider comparison basket, rose to 74.03 from 73.61.

“While the level of consumer spending was far from impressive, consumption was firm enough to sustain speculation that the Federal Reserve will taper asset purchases this year,” said Kathy Lien, managing director of FX strategy for BK Asset Management, in a research note.

Two-thirds of economists on Wall Street expect tapering to begin in September, a move that would widely be seen as dollar-positive. The central bank will see two other retail sales reports and another monthly jobs report before its two-day meeting starts on Sept. 17.

The Federal Reserve currently buys $85 billion in mortgage and Treasury debt each month as part of its efforts to revive the economy. The asset purchases have been understood to weigh on the dollar.

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The dollar trades higher, including a sizeable gain against the Japanese yen.

In the euro zone, German economic sentiment beat expectations in August, leaping to a five-month high. Industrial production in the region was fueled by Germany, with second-quarter output rising at the fastest quarterly rate since the last three months of 2010.

The British pound, or sterling,
GBPUSD, +0.01%
traded at $1.5444, lower than $1.5471 late Monday. The sterling briefly posted gains against the greenback, reaching an intraday high of $1.551 on Tuesday, according to FactSet data.

That move was driven by the decline in the euro-sterling cross
EURGBP, +0.01%
said Richard Smith, a trader at Faros Trading. The euro hit an intraday low of 0.8533 pounds Tuesday morning, according to FactSet. The shared currency has since recovered, fetching 0.8585 pounds compared with 0.8599 pounds late Monday.

“The euro-sterling cross is definitely a heavily positioned long right now in the market,” said Smith. A long position in this cross is a bet that the euro will rise against sterling. As such, a break lower in the cross would result in short-term increasing buying of British sterling, he added.

The Australian dollar
AUDUSD, +0.01%
bought 90.95 U.S. cents, pulling back from 91.50 U.S. cents.

In Japan, the yen lost ground against the greenback after a report said Japan will look into cutting corporate taxes. Japanese stocksNIK, -0.06%
ended higher after the Nikkei newspaper reported that Japanese Prime Minister Shinzo Abe may propose reducing corporate taxes to offset pressure on growth from a planned increase in the national consumption tax.

Abe, who hasn’t made a final decision on implementing a two-stage sales-tax hike, has called for a study on using corporate tax cuts to pull in more foreign capital and enhance economic growth.The planned hike in the consumption tax is aimed at lowering the country’s massive public debt.

The yen had briefly strengthened after Japanese core machinery orders fell 2.7% in June, better than expectations for a 7.1% drop, according to Dow Jones Newswires. Core machinery orders are seen as a leading indicator of capital spending in Japan.

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